The annual Legal Seminar For Credit Professionals, presented by Kegler Brown in conjunction with NACM – Great Lakes Region and American Subcontractors Association, was combined with an international business and construction legal program. Topics included selling internationally, post-judgment collection, bankruptcy, bids and pay-if-paid clauses.

2. Post-Judgment Collection:
Now What?
presented by Dan Bennett
Legal Seminar for Credit Professionals
October 24, 2013

3. Which Clubs In the Bag are We Talking About?
• Creditors: Secured/Undersecured/Unsecured
• Debtors: Consumer (i.e., personal) vs. Business
• Debts: Business debts

4. Old Sayings…
• “Obtaining a judgment is easy, collecting one is
difficult.”
• “A judgment is only a piece of paper unless you can
collect on it.”

5. Procedural Posture
• Case has been litigated and creditor has legal
pronouncement from court with competent
jurisdiction that debt is owed.
• Trial, Agreed Entry, Default.
• Domestication of Judgments.

6. #1 Impediment to Collecting
• (besides your debtor being broke) Guesses?
• The number one impediment to collecting is
information. Specifically, precise information of
assets classes to collect on.

7. Non-Judicial Methods
• You (the client). The closer a credit manager is to the
debtor the more information they can usually
provide.
• Credit application. Old credit reports.
• Public records/asset searches (real estate, cars,
boats, other pending lawsuits).
• Bank account searches.

8. Finding a Debtor
• Businesses – secretary of state, Dun & Bradstreet,
Google, Facebook, other lawsuits.
• Individual – Google, Facebook, LinkedIn, court
records, marriage/domestic court records, private
investigator/process server.

9. Judicial Methods
• Ohio Civ. R. 69 – a judgment creditor may obtain
discovery from a judgment debtor in any manner
otherwise provided for under the rules.
– Third Party Subpoena.
– Written discovery requests.
– Depositions.

10. The Judgment Debtor Examination
• What is it? An opportunity to ask the judgmentdebtor questions, in person, under oath.
• Two versions: Noticed vs. Court Ordered

11. What If They No-Show?
• If noticed, must file Motion to Compel.
• If Court-Ordered – Capias procedure.
– Inapplicable to corporate officers.

12. Judgment Liens
• Automatically recorded upon filing certified copy of
judgment in relevant county.
• Foreclosure permitted.
• Practical value minimal, except for rare
circumstances.

13. Wage Garnishments
• Permitted in all states, but exemptions vary
significantly.
– Ohio: Greater of 60 x Federal Minimum wage or 75% of
“disposable earnings.”
– Debtor entitled to hearing.
• Depending on personal balance sheet of debtor,
could prompt bankruptcy filing.

14. Non-Wage Garnishments
• Most often in the form of a “bank garnishment.”
• Streamlined procedure, but not continuous.
• Gets the debtors attention, sometimes results in
payment plan.

15. Garnishments, Misc.
• Garnishee Liability: What if the bank doesn’t
answer?
• Joint accounts.
• Special types of property: Trusts, Annuities,
Exemptions, etc.

16. Execution
• Complicated process, involving more legal fees and
• Exemptions are significant, and growing.
• For business creditors, usually secured creditors will
cause issues with execution.

17. Charging Orders
• ORC 1705.19: Judgment creditor may apply to a
court of common pleas to charge the membership
interest of the member with payment of the debt.
– Creditor receives profits or distributions from LLC.
– May still pursue other remedies (i.e., foreclosure sale).
• Applies to partnerships. ORC 1776.50.

18. Creditor’s Bill
• Patent’s or intellectual property, money through a
will, other intangible assets (legal claims). E.g., In re
Estate of Mason, 109 Ohio St.3d 532 (2005).
• Take JDE before hand – must present evidence that
debtor has insufficient assets.
• Remedy is a lien on the intangible property. Will
have priority over other creditors who did not pursue
a Creditor’s Bill.

19. Fraudulent Transfers
• ORC §1336.04: A transfer (made before or after debt
is incurred) is fraudulent if:
– There’s actual intent to defraud; or
– Debtor does not receive equivalent value AND
• Remaining assets are unreasonably small in relation to the
transaction; or
• Debtor incurred debts beyond his ability to pay as they became
due.

20. “Badges of Fraud”
• Actual evidence of fraud unlikely.
• The “Badges of Fraud.” Creditor has burden to prove
transfer was fraudulent, but if creditor can
demonstrate three “badges of fraud,” burden will
likely shift to debtor. Blood v. Nofzinger, 162 Ohio
App. 3d 545.

21. Remedies
• ORC 1336.07 - provides for various types of relief,
including avoidance of the transfer or obligation,
attachment, garnishment, injunctive relief,
receivership, or such “other relief as the
circumstances may require.”

22. Piercing the Corporate Veil
• (1) control over the corporation by those to be held liable
was so complete that the corporation has no separate
mind, will or existence of its own
• (2) control over the corporation by those to be held liable
was exercised in such a manner as to commit fraud, an
illegal act, or similarly unlawful act against the person
seeking to disregard the corporate entity, and
• (3) injury or unjust loss resulted from such control and
wrong.”

23. Thank You!
Dan Bennett, Director
dbennett@keglerbrown.com
(614) 462-5448

24. Bankruptcy Section 365’s Treatment of
Executory Contracts & Unexpired Leases
presented by Kenneth Cookson and
Donald W. Gregory
Legal Seminar for Credit Professionals
October 24, 2013

25. What is an Executory Contract?
A contract under which the obligation of both the bankrupt and
the other party to the contract are so far unperformed that
failure of either to complete performance would constitute a
material breach of excusing performance of the other.

26. Three Instances of an Executory Contract
1. Where the debtor has completed its performance under the
contract, the unperformed portion by the other party is not
treated as an executory contract. Rather, the completed
portion is treated as an asset of the bankruptcy estate.
2. Where the other party has substantially performed, but the
debtor has not, there is likewise no executory contract.
Rather, the bankruptcy estate already has the benefit of the
performance and therefore the performing party has a claim
in the bankruptcy.
3. Where both parties still have performance to complete,
there is an executory contract.

27. What is the impact of a bankruptcy filing on a
construction project?
Someone will replace the debtor, normally at additional
cost.
Lien and bond rights of suppliers and subtrades of the
debtor must be extinguished.

28. What happens with respect to replacing a
defaulting contractor?
1.
2.
3.
4.
Has a default occurred under the contract?
Has proper notice been given?
Can contract be assumed or rejected?
How will “double payment” to debtor’s
suppliers/subtrades be minimized?
Even if “Ipso Facto” clauses are unenforceable there
generally are other termination grounds.

29. What is the impact of the automatic stay?
STAY = Automatically stays most efforts to collect
debtor’s pre-bankruptcy debts.
Violation can result in damages and fees and actions in
violation of stay are void.

30. Should you seek relief from the stay?
1. To foreclose on a private lien.
2. To file lien against public funds.
Grounds:
1. Lack of adequate protection.
2. No equity in the property.

31. What happens with mechanic’s lien rights?
Stay does not stop perfection of mechanic’s liens.
(at least on private liens)
Stay does prohibit actions to foreclose a lien.
Secured creditor to extent of equity in property.

32. What happens with respect to
performance and payment bond rights?
Bond claims can be perfected and pursued against the
bonding company even if debtor is bankrupt.

33. Is a lien a preference?
Generally not.
Normally exempted from preference attack.
Can provide Lien Waiver in exchange for Direct
Payment particularly if Notice of Furnishing Provided.

34. Are payments to avoid a mechanic’s lien a
preference?
As to Debtor Property:
Generally No, because:
• Could have filed a lien anyway so no net
difference.
As to Third Party Property:
Probably No, if:
A. Project funds are not really property of debtor;
or
B. In Exchange for New Value.

35. “New Value” Defense
Best if:
1. Joint Check Agreement;
2. Notice of Furnishing; and/or
3. Lien Waiver.
This may constitute “New Value.”

36. Better to Recover Money in 1st Place And risk partial preference and return later than to
never recover money.

37. What if someone threatens to “bond off” the
lien?
As Clint Eastwood said:
“Make my day!”
You will now have security for the lien and be able to
pursue a collectable entity.
Bond = 1 ½ times the Lien Amount Approved by the Court.
Commence suit if given Notice to do so.

38. What if someone signs a false document?
If someone falsely executed a lien waiver, affidavit or
other project document → with intent to deceive =
PERSONAL LIABILITY.
O.R.C. § 1701.93.

39. Do Chapter 11 reorganizations work for
construction companies?
Rarely.
Credit will no longer be extended.
Relationships and reputation matter.

40. Thank You
Kenneth Cookson, Director
kcookson@keglerbrown.com
(614) 462-5445
Don Gregory, Director
dgregory@keglerbrown.com
(614) 462-5416

41. Breakout Session: Basic Bankruptcy 101
presented by Christy A. Prince
Legal Seminar for Credit Professionals
October 24, 2013

42. Purposes of Bankruptcy Law
1. Gives debtors a chance for a “fresh
start” by releasing some or all of their
debt
The bankruptcy code assumes that debtor cannot
continue operating as it did in the past, and that the
debtor or its assets will be more productive after
bankruptcy

43. Purposes of Bankruptcy Law
2. Provides an orderly manner for
payment of creditors, preventing a
“race to the courthouse”
Bankruptcy gives the debtor an opportunity to
negotiate and implement deals with creditors in a
protected environment

44. How Bankruptcy Works
• Requires full transparency by debtor as to
assets, liabilities, and transfers
• Creates a new “estate” which includes all assets and
liabilities of the debtor prior to filing for bankruptcy
• Sets up a priority system for different types of claims
and creditors

45. Types of Bankruptcy
•
•
•
•
Chapter 7 – liquidation
Chapter 11 – reorganization
Chapter 13 – repayment plan
Other types – farmers, municipalities

46. Chapter 7
1. A neutral trustee is appointed by the court
2. The trustee liquidates all of the debtor’s nonexempt assets to raise funds to pay unsecured
creditors
3. Chapter 7 is designed for organizations and
individuals who have mostly business debt, and for
low-income individuals

47. Chapter 13
1. Debtors repay a percentage of their debts over
time for three to five years
2. Debtor generally stays in control of his or her
property – a trustee does not take over debtor’s
assets
3. Chapter 13 is designed for individuals who receive
regular income and who have debt under certain
limits
4. Businesses cannot file under chapter 13

48. Chapter 11
1. Under chapter 11, a troubled business reorganizes
while continuing to operate
2. The Debtor-In-Possession (“DIP”) files a Plan
outlining how the debtor plans to repay creditors
throughout its reorganization

49. Chapter 11 – Creditor’s role
• Creditor participation can influence the case
• All creditors have an opportunity to vote – accept or
reject this Plan
• Large chapter 11 cases may have Creditors’
Committee to give the unsecured creditors another
voice

50. In the Beginning
Notice of Bankruptcy
–
–
–
–
–
Debtor’s name
Case number and petition date
Name and address of trustee
Date and location of the creditors’ meeting
Deadline for some objections and claims

51. In the Beginning
• Automatic Stay
• Section 341 meeting
• Filing a claim

52. Automatic Stay
Creditors cannot take action against the debtor or
against the property of the estate, or exert control
over property of the estate
•
•
•
•
Can’t make collection calls or send demand letters
Can’t file a lawsuit or enforce a judgment
Can’t repossess collateral or setoff debt
Can’t allow prior actions to proceed
– i.e., wage garnishments or bank attachments

53. Purpose of the Automatic Stay
• To provide the debtor with a “breathing spell”
from creditor action
• To promote an orderly administration of the case,
including equality of distribution among claimants
and prevention of claims being filed in different
forums

54. Penalties for Violating the Stay
1. Compensatory damages for any violation
Lack of actual notice is not a defense
2. Punitive damages for willful violation
3. Courts are very hard on creditors who received
notice of bankruptcy, even if creditor didn’t have
actual notice (i.e., if creditor’s system didn’t
catch the notice)

55. Stay Safe
• Make sure you have a system in place for notices of
bankruptcy
• Any employee anywhere in your organization who
may make collection call against your account debtor
must be immediately advised if a bankruptcy has
been filed
• Especially important if you have multiple offices and
mailing addresses

56. Stay Safe
If you use an outside company for collections:
– Any notice they receive is imputed to you
– Any notice you receive is imputed to them
– Any violation they commit is imputed to you

57. Stay Safe
• The automatic stay is interpreted very broadly
• Obtain relief from stay if appropriate
– To repossess collateral
– To proceed with a pre-petition lawsuit against non-debtor
parties

58. Chapter 13 Co-Debtor Stay
• Two borrowers are jointly liable on a debt
• One borrower files a chapter 13 bankruptcy
• Automatic stay prevents creditor from collecting debt
from the non-filing co-debtor

59. Chapter 13 Co-Debtor Stay
Creditor can move for relief from co-debtor stay if:
• Debtor’s chapter 13 plan does not propose to pay
creditor in full, or
• Non-filing borrower received consideration for the
claim (not just a guarantor, etc.)

60. Adequate Protection
• Secured creditors are entitled to adequate protection
to compensate for depreciation of collateral
• If collateral has “equity cushion,” that is adequate
protection for creditor
• Creditor can move for adequate protection payment
if necessary

61. Attend the Creditors Meeting?
Consider:
• Type of bankruptcy and type of trustee
• Whether the claim is secured by collateral
• Whether there was some irregularity in the
extension of credit, i.e., false lien waivers or credit
application

62. Attend the Creditors Meeting?
1. To verify condition/location of collateral
2. To negotiate with debtor and/or trustee with
respect to collateral
3. To question the debtor about any irregularities
4. To gather facts, especially if an objection to
discharge is possible

63. When to File a Claim
• Creditors can file a claim as soon as they receive the
notice of bankruptcy
• Deadline to file claims is stated on the notice of
bankruptcy – typically 120 days
• You may receive no distribution even if you file a
claim

64. Filing a Claim
1. Use the proof of claim form provided by the
clerk’s office
2. File with the clerk of court in the district where
the case is pending

65. Filing a Claim
3. Attach documentation such as invoices or a
statement of debtor’s account
4. If documentation provides for interest, creditor
gets interest pre-petition only
5. If property of the estate is collateral, attach the
security agreement and evidence of the
perfection of the security interest

66. Filing a Claim
6. The creditor or authorized agent must sign the
proof of claim
7. Send an additional copy and a SASE to the clerk &
request the return of a file-stamped copy

67. Payment of Claim
Payment depends on:
• Priority of claim (taxes, wages, etc.)
• Existence of collateral
• Whether assets are available to liquidate
• Treatment of claim class in chapter 11 case
• Existence of administrative expenses and priority
claims ahead of your claim

68. Bankruptcy Discharge
• Fresh start for debtors
• Debtors are allowed to strip away debt that arose
prior to the petition in bankruptcy being filed
• Individual debtors are allowed to exempt some basic
property in order to facilitate the fresh start

69. Exceptions to Discharge
1. Debtor is not an individual
2. Debtor lies during bankruptcy or conceals assets
3. Debtor received a discharge in a different
bankruptcy filed in the past 8 years
4. Debtor fails to cooperate with bankruptcy laws and
orders

70. Dischargeability of Certain Debts
• Money/services obtained by false pretenses, false
representations, or actual fraud
• Embezzlement, larceny, or defalcation
• Debts for willful or malicious injury by the debtor to
another entity or to the property of another entity
• Failure of the debtor to name the creditor in the
bankruptcy, unless the creditor had notice or actual
knowledge of the case

71. Dischargeability of Certain Debts
• Creditor/claimant must file a complaint in the
bankruptcy court by the deadline
• Debtor has the opportunity to defend the
complaint and try to overcome the presumption
• These are hotly contested and can involve a lot of
legal costs

72. Fraudulent Transfer
• Debtor transferred property in the four years prior to
bankruptcy
• Debtor did not receive reasonably equivalent value
for the transfer
• Debtor was insolvent, or became insolvent or too
thinly capitalized because of transfer

73. Fraudulent Transfer (intentional)
• Debtor transferred property in the four years prior to
bankruptcy
• Transfer was made with intent to hinder, delay, or
defraud any creditor

74. Proving Fraudulent Intent
•
•
•
•
Whether transfer was to insider of debtor
Whether transfer was concealed
Whether debtor retained control of asset
Whether transfer was of substantially all debtor’s
assets
• Whether transfer occurred around the time a
substantial debt was incurred

75. Questions?

76. Thank You!
Christy A. Prince, Associate
cprince@keglerbrown.com
(614) 462-5444

78. News From Bankruptcy Wars
presented by Larry McClatchey
Legal Seminar for Credit Professionals
October 24, 2013

79. Preferences
A transfer of an interest of the debtor in property –
• (1) to or for the benefit of a creditor;
• (2) for or on account of an antecedent debt owed by the
debtor before such transfer was made;
• (3) made while the debtor was insolvent;

80. Preferences
• (4) made –
– (A) on or within 90 days before the date of the filing of the petition; or
– (B) between ninety days and one year before the date of the filing of the
petition, if such creditor at the time of such transfer was an insider; and
• (5) that enables such creditor to receive more than such creditor
would receive if –
– (A) the case were a case under chapter 7 of this title;
– (B) the transfer had not been made; and
– (C) such creditor received payment of such debt to the extent provided by the
provisions of this title.

81. Preference Defense:
Contemporaneous Exchange
(c) The trustee may not avoid under this section a transfer –
• (1) to the extent that such transfer was –
– (A) intended by the debtor and the creditor to or for whose benefit
such transfer was made to be a contemporaneous exchange for new
value given to the debtor; and
– (B) in fact a substantially contemporaneous exchange;

82. Preference Defense:
Ordinary Course of Business
• (2) to the extent that such transfer was in payment of a debt
incurred by the debtor in the ordinary course of business or
financial affairs of the debtor and the transferee, and such
transfer was –
– (A) made in the ordinary course of business or financial affairs of the
debtor and the transferee; or
– (B) made according to ordinary business terms;

83. Preference Defense: New Value
• (4) to or for the benefit of a creditor, to the extent that, after
such transfer, such creditor gave new value to or for the
benefit of the debtor—
– (A) not secured by an otherwise unavoidable security interest; and
– (B) on account of which new value the debtor did not make an
otherwise unavoidable transfer to or for the benefit of such
creditor;

84. “20 Day Goods” and Critical Vendor Issues
• Priority administrative expense for goods received by
debtor within 20 days before filing in ordinary course
of business.
• Payments to “critical” prepetition suppliers –
continued increased scrutiny.

85. Current Secured Transactions Issues
1.
2.
3.
4.
Unauthorized Terminations
Proper Legal Name of Debtor
Consignments
Possessory Liens

86. Thank You!
Larry McClatchey, Director
lmcclatchey@keglerbrown.com
(614) 462-5463

87. Basics of Bankruptcy 102
presented by Stephanie P. Union
Legal Seminar for Credit Professionals
October 24, 2013

88. Chapter 11
1. “Reorganization”
2. Troubled businesses continue to operate &
revitalize
3. Current Management vs. assigned trustee
4. Creditors’ Committee for large Chapter 11’s
5. The Debtor-In-Possession (“the DIP”) files a “Plan”
outlining repayment to creditors.

89. Chapter 11 (cont’d)
6. All creditors have an opportunity to accept
or reject the Plan.
7. Once the Plan is confirmed, the debtor is released
from all pre-confirmation debts.
8. Creditor Participation is important.
9. Can last 8 months to several years

90. Types of Chapter 11’s
• An individual can file
– If outside the debt limits for 13
• Small businesses
– Special provisions in code for them
• Corporations
– Likely what you think of when hear a “Chapter 11”

91. Creditor’s Committees
• Formed at the beginning of the case
• Usually solicited by the US Trustee’s office
• Typically from the largest unsecured creditors of the
debtor
• Committee can hire counsel, whose fees are paid by
the estate

92. Creditor’s Committees
• How to decide if you’d like to participate?
–
–
–
–
Amount of money at stake
Someone willing to dedicate the time to it?
Want to see the company succeed?
The experience

93. The Plan: 11 U.S.C. §1123
• Typically proposed by the DIP
– Exceptions, after first several months, other parties in
interest may propose it
– Court can extend or limit the “exclusivity period” giving
debtor the sole ability to file
• The plan tells how it proposes to treat creditors
• Must propose to treat the same classes of claims in
the same manner unless agreed to otherwise

94. The Plan
• It may impair classes of claims or interests
• It may modify the rights of secured claims (other
than a claim secured by the debtor’s principal
residence) or unsecured claims
• Need to carefully review the plan to ensure you
understand how it is proposing to treat you and
whether that is allowed under the law

95. Plan Options
• Plans can propose partial or complete liquidation
• They can seek mergers of other companies where
creditors are paid from future profits (a “Bootstrap”
plan)
• Can offer an exchange of debt for new securities
• Can offer to distribute assets to third parties or
creditors
• Options are limitless

96. Confirmation Requirements
• Many requirements
• The most important requirements:
– That the Plan be feasible (debtor will be able to perform;
expert testimony usually required)
– That the Plan propose a better result for creditors than
would occur in a Chapter 7 liquidation. (“Best interest of
creditors” test)
– That the creditors “accept” the Plan.

97. Rights of Creditors
• Claims are secured up to the value of the debtor’s
interest in the creditor’s collateral.
– e.g., if debt of $1,500,000 in real estate and real estate’s
value is $1,000,000, secure claim equals $1,000,000. Also
have an unsecured claim of $500,000.
– Unsecured portion of the claim will be treated the same as
other unsecured debts under the plan.

98. The Disclosure Statement
• Usually filed in conjunction with the Plan.
• Needs to have adequate information so that
creditors can decide whether to accept or reject the
plan.
• The Court makes that determination
• Once approved, Plan, Statement and Ballot sent to
each creditor in an impaired class for voting

99. Voting on the Plan
• Creditors will receive a ballot
• Have to have an “impaired class” vote to accept the
proposed treatment
• Majority of the votes cast must be in favor of the
Plan
• The majority of the votes cast in favor must
represent more than 2/3rd of the dollar value of
claims actually voting

100. If impaired class does not accept…
• Can still confirm the plan over the objection of a
rejecting class
• Called a “cram down”
• Need to meet certain criteria:
– Absolute priority rule
• A junior class of interest (e.g., shareholder) or junior class of
creditors (e.g., debenture holders) may not receive or retain
anything of value under the Plan unless each senior class consents.

101. Confirmation of the Plan
• Must pay all administrative expenses in full.
– Court costs
– Professional fees
– Most tax debts (can be stretched out to repay)

102. Effect of Confirmation
• Binds the debtor and creditors to its terms unless
modified later
• Vests all property of the estate back in debtor except
as otherwise provided in the Plan
• Property free of all claims except as provided by the
Plan (discharge)

103. Buying and Selling Claims
• Can be done in any chapter of bankruptcy
• More typically seen in chapter 11s and larger asset
cases
• There is a market for claims
• Those offering to purchase are making their money
on the belief they will get more for them through the
bankruptcy than they pay to you

104. Buying and Selling Claims (cont’d)
• Advantage is you get your money in a sum certain
now versus waiting for an unspecified distribution at
an unknown date.
• If want to sell:
– Make sure to review the fine print
– Often liable if the claim is not allowed
– Often liable to defend preference and other claims,
including liability for attorney’s fees

105. Administrative Expenses
• Administrative claims are paid first
• Section 503(b)(9):
– For goods sold within 20 days of the filing of the
bankruptcy
– Does not apply to services provided to Debtor
– Have to be goods sold in the ordinary course of
business
– Secured creditors can file them too

106. Administrative Expenses
• Section 503(b) allows administrative claim for the
actual & necessary costs of preserving the estate
– Includes wages (for workers, etc.)
– If doing work that is benefiting
a non-liquidating estate

107. Application for Administrative Expense or Proof
of Claim?
• Application for allowance of the expense
– Different than a standard proof of claim
– Some chapter 11s instruct administrative claimants to file
poc’s instead though
– Several lower courts have held that proofs of claim that
clearly request administrative expense status may be
treated as a request for payment under 503(a), including In
re Cardinal Indus., Inc. 151 B.R. 838,841 (Bank. S.D. Ohio
1992).

108. Executory Contracts and Leases
• Governed by 11 U.S.C. §365
• Executory contract: one where obligations not yet
fully performed, i.e., supply agreement
• Cannot stop performing your obligations under a
contract due to automatic stay

109. Executory Contracts
• Debtor or Trustee can assume or reject the contracts.
• If assume, have to cure default or provide adequate
assurance that it will promptly cure
• Compensate for pecuniary loss or provide adequate
assurance of same
• Provide adequate assurance of future performance

110. Preferences: 11 U.S.C. §547
Elements:
1. Transfer of property of the debtor.
2. To or for the benefit of a creditor.
3. On account of an antecedent debt. Payment must be made
for a past due indebtedness.

111. Preference Elements Cont’d
4. Made while the debtor was insolvent.
–
–
–
There’s a presumption of insolvency in the ninety (90) days prior to
bankruptcy
if property is transferred to an insider, look back is 1 yr;
and
5. Enabling the creditor to receive more than it would have
received in a Chapter 7 case if the transfer had not been
made.

112. Affirmative Defenses
If all of the elements of the preferential transfer can be proved
by the Trustee or DIP, the creditor still may win if the creditor
can establish an affirmative defenses in the following
categories:
1.
2.
3.
4.
5.
6.
7.
Contemporaneous exchange for new value;
Enabling loan;
Subsequent new value, subsequent advance;
Floating lien;
Statutory lien;
Consumer transaction (aggregate value less than $600.00).
Ordinary course of business:

113. Ordinary Course of Business
Designed to encourage creditors to deal with financially
troubled companies on normal credit terms by
obviating any worry that a subsequent bankruptcy filing
might require a creditor to disgorge as a preference a
payment it received

114. Elements of Ordinary Course of Business
Exception
• A payment of a debt incurred in the ordinary course
of the business or financial affairs of the debtor and
the transferee;
• Made in the ordinary course of business of the
debtor and the transferee; or
• Made according to ordinary business terms.

115. New Value Exception
• If a creditor gives new value (money or money’s
worth in goods, services, or new credit or release of
property previously transferred by the transferee) to
the debtor after the preferential transfer, that new
value can be offset to reduce or eliminate the
preference exposure.

116. New Value Elements
• The new value can not be secured by an otherwise
unavoidable security interest;
– Has to be on an unsecured basis or
– Secured by an avoidable security interest
and
• On account of which new value the debtor did not
make an otherwise unavoidable transfer to or for the
benefit of such creditor.

117. New Value Nuances
• A transfer by check is deemed to occur when the
check is received by the creditor.
• Contrast this to the transfer being deemed to occur
on the date the check is honored to determine
initially if it is preference.
• If goods shipped, new value is deemed extended at
the time the goods are shipped.
• Creditor’s transfer has to be subsequent to the
debtor’s preferential payment to qualify for new
value defense

118. Questions?
Stephanie P. Union, Director
sunion@keglerbrown.com
(614) 462-5487
Christy A. Prince, Associate
cprince@keglerbrown.com
(614) 462-5444

119. THE BIG IF IN “PAY-IF-PAID” CLAUSES:
THE GREAT RISK FOR SUBS & SUPPLIERS
presented by Donald W. Gregory
Legal Seminar for Credit Professionals
October 24, 2013

120. PAYMENT
THE LIFEBLOOD OF ANY SUBCONTRACTOR
WHO PAYS LABOR EVERY FRIDAY AND SUPPLIERS IN
30 DAYS.

121. YET SUBS ARE ASKED TO
TAKE CREDIT RISKS
NOT ACCEPTED BY GCs AND SUPPLIERS.

122. AND IF SUBS ARE NOT PAID
THERE IS OFTEN THE PRACTICAL EFFECT OF NOT
PAYING SUPPLIERS!
So Suppliers Should Care About “Pay-if-Paid” too.

123. TWO TYPES OF CONTINGENT PAYMENTS
1. Pay-when-Paid
2. Pay-if-Paid

124. PAY-IF-PAID
Shifts
1.
Credit Risk of Owner
Non-Payment
2.
Risk of Contractor (or other Sub)
Non-Performance

125. PAY-WHEN-PAID
• In most states, an implied duty to pay in a
REASONABLE PERIOD OF TIME.

126. EXAMPLE OF A
“PAY-WHEN-PAID” CLAUSE
8.2
TIME OF PAYMENT.
Progress payments to the
Subcontractor for satisfactory performance of the Subcontract
Work shall be made no later than seven (7) days after receipt by
the Contractor of payment from the Owner for the Subcontract
Work. If payment from the Owner for such Subcontract Work is
not received by the Contractor, through no fault of the
Subcontractor, the Contractor will make payment to the
Subcontractor within a reasonable time for the Subcontract
Work satisfactorily performed.
ConsensusDOCS 750

127. THE KINDER-GENTLER PAYMENT TERM
• Pay-When-Paid
– Paid within a reasonable period of time.
– General Contractor still obligated to pay even if Owner
doesn't make payment.

128. EXAMPLE OF A PAY-WHEN-PAID CLAUSE
AIA A401-2007 §11.3
If Owner fails to pay, payment on demand.

129. THE KILLER CONTRACT CLAUSE FOR
SUBCONTRACTORS

130. # 1 CONTINGENT PAYMENT
THE NOT SO BAD
• “Pay When Paid” =
• Payment in a Reasonable
Time.
• Deals with Timing, Not
Entitlement.
THE UGLY
• “Pay If Paid” =
• If Owner Never Pays,
Subcontractor Never Gets
Paid.
• Deals with Timing and
Entitlement.
• Shifts Entire Credit Risk of
Owner Insolvency to
Subcontractor.

131. PAY-IF-PAID – THE HARSH PAYMENT TERM
• Pay-If-Paid
– You don’t get paid IF they don’t get paid.

132. WHAT WORDS SHOULD BE AVOIDED?
• IF
• CONDITION PRECEDENT

133. HOW TO SPOT A PAY-IF-PAID CLAUSE?
Condition
Precedent

134. PROGRESS PAYMENT

135. SAME GOES FOR FINAL PAYMENT

136. EXAMPLE OF A PAY-IF-PAID CLAUSE
The obligation of Turner to make a payment under
this Agreement, whether a progress or final
payment, or for extras or change orders or delays to
the Work, is subject to the express condition
precedent of payment therefor by the Owner.
Final payment to Turner by the Owner shall be an
express condition precedent which must occur
before Turner shall be obligated to make final
payment to the Subcontractor.

137. TO BE ENFORCEABLE A PAY-IF-PAID
CLAUSE MUST BE:
• Clear and unambiguous
– If not, construed against the drafter
– Will render the term Pay-When-Paid
• Why is that important?
– It must be drafted correctly
– If not, “benefit of the doubt” will go to the subcontractor
• Construed as the more favorable Pay-When-Paid

138. WATCH OUT FOR
“HYBRID” PAY-WHEN-PAID
• Uses Pay-When-Paid Type Language.
• But Places Timing So Far In Future To Effectively
Become PAY-IF-PAID.

139. BEWARE OF “A WOLF IN SHEEP’S
CLOTHING”
Pay-when-Paid extended to be effectively Pay-ifPaid.
(i.e. paid after a lawsuit, or over 3 years, etc.)

140. WATCH OUT FOR PAY-IF-PAID IN CLAUSES
GOVERNING:
1. Change Orders
2. Claims or Requests or Equitable Adjustment

141. EXAMPLE OF A PAY-IF-PAID DELAY CLAIM
Except to the extent that the delay, obstruction, hindrance or
interference is caused by Turner or another subcontractor of Turner, the
Subcontractor agrees that it shall not be entitle to nor claim any cost
reimbursement, compensation or damages for any delay, obstruction,
hindrance or interference to the Work except to the extent that Turner
has actually recovered corresponding cost reimbursement,
compensation or damages from the Owner under the Contract
Documents for such delay, obstruction, hindrance or interference, and
then only to the extent of the amount, if any, which Turner on behalf of
the Subcontractor, actually received from the Owner on account of such
delay, obstruction, hindrance or interference.

142. Except to the extent that the delay, obstruction, hindrance or
interference is caused by Turner or another subcontractor of Turner, it
shall be an express condition precedent to any obligation on the part of
Turner to make payment of any such cost, reimbursement, compensation
or damages to the Subcontractor hereunder that Turner shall first be
determined to be entitled to such compensation on behalf of the
Subcontractor and then receive such payment from Owner.
The Subcontractor agrees that it shall contribute a fair and proportionate
share of the costs of advancing the claims of the Subcontractor for delay,
including but not limited to legal and other professional fees.

143. WHAT STATES BAN PAY-IF-PAID?
By Judicial Decision:
• New York
• California
By Legislation:
•
•
•
•
Illinois
North Carolina
South Carolina
Wisconsin

144. WHAT ABOUT LIEN OR BOND CLAIMS?
Generally cannot recover on payment bond or
foreclosure lien (“no money yet due”).
Unless your state statute provides otherwise.

145. SOME STATES PERMIT “PAY-IF-PAID” BUT
STILL ALLOW LIEN RIGHTS TO BE PRESERVED
• Indiana
• Ohio
• Missouri

146. TRANSTAR ELECTRIC
There is a case now pending in the Ohio Supreme Court
that will determine if Pay-if-Paid remains enforceable in
Ohio.

147. SOME STATES PERMIT “PAY-IF-PAID” BUT
STILL ALLOW BOND RIGHTS TO BE PRESERVED
• Maryland

148. WOULD A SUBCONTRACTOR OR SUPPLIER
PRICE RISK THE SAME IF:
• No lien rights?
• No bond rights?

149. KNOWING THE RISK OF PAY-IF-PAID
• Should a Subcontractor Price the Risk the same?
• Should a Supplier Extend the Same Credit?

150. PRACTICAL POINTERS
• Look for contracts with good payment terms
– Fixed Payment Terms
– Pay-When-Paid Language
• Try to insert Pay-When-Paid Language
– Use AIA A401 or ConsensusDOCS 750
• Modify Pay-If-Paid Language

151. TRADE ASSOCIATION
SUBCONTRACT FORMS
• Provide some relief
• Can be cited for the reasonableness of your position

152. AIA SUBCONTRACT
• AIA A401 [1997 edition].
• Traditionally endorsed by ASA and ASC, but never
by AGC.
• Most favorable to Subs.
• A401 [2007] less favorable to Subs.

153. AGC SUBCONTRACTS
In the Past:
• AGC 650
– Endorsed by ASC, not ASA
“Pay-When-Paid”
• AGC 655
– Not endorsed by ASC or
ASA
Now:
• ConsensusDOCS 750
– Endorsed by AGC, ASA and
others
“Pay-If-Paid”
“Pay-When-Paid”

154. IN THE PAST
ASA and AGC could not agree on Contingent
Payment language.

155. NOW
ASA and AGC agree upon Contingent Payment
ConsensusDOCS 750.

156. CONSENSUSDOCS 750 SUBCONTRACT
NOW (YEAH!) ASA and AGC HAVE AGREED ON A
PAY-WHEN-PAID SUBCONTRACT.

157. PRACTICAL TIPS
Qualify Your Bid:
• “This bid is conditioned upon use of the ConsensusDOCS 750+ Subcontract
Form or other contract form acceptable to Subcontractor.”
Educate Your Customer:
• Let them know upfront what subcontract forms are acceptable to your
company and be prepared to explain why certain language is one-sided
and unfair.

158. MORE PRACTICAL TIPS
Negotiate a Fair Agreement:
• ASA provides commentary on the AIA and AGC Subcontract forms, as well
as an Addendum to neutralize the AGC 650 and 655 forms.
asaonline.com
• ConsensusDOCS available at www.consensusdocs.org
Refuse One-Sided Forms (“Principal Costs”)
• Nobody needs to work for free or take on a problem project. You must be
prepared to “walk away” absent an equitable agreement.

159. Thank You!
Don Gregory, Director
dgregory@keglerbrown.com
(614) 462-5416

161. Bid Shopping & Bid Protests
presented by Eric B. Travers
Legal Seminar for Credit Professionals
October 24, 2013

162. Program Agenda
• In today’s program we’ll discuss:
– Understanding Bid Shopping and Bid Peddling
– Why bid shopping and peddling are a legal and ethical
problem for subs, contractors, and owner.
– Explore practical options construction participants can
utilize to protect themselves from bid shopping and
peddling.
– What a bid contest is.
– Legal standard in Ohio for sustaining a bid protest.
– Considerations owners, prime contractors, and
subcontractors must make when making or defending a
bid protest.

163. What is Bid Shopping?
General Contractor discloses a Sub’s bid price to a
competitor of the subcontractor in an attempt to
get a lower bid than the one on which the General
Contractor based its bid to the Owner.

164. What is Bid Peddling?
Sub whose bid was not selected contacts (after the
Owner has awarded the Prime Contract) the General
Contractor and offers to reduce its bid to induce the
General Contractor to give it the subcontract
(substitute the reduced bid).

165. What Does the Industry Say
About Bid Shopping?
AGC:
“abhorrent”
“resolutely opposed”
From AGC’s website:
“Bid shopping or bid peddling are abhorrent business practices that
threaten the integrity of the competitive bidding system that serves
the construction industry and the economy so well. AGC strongly
believes that bid shopping and bid peddling cannot sustain long-term
working relationships between prime and subcontractors.”
ASA:
“abhorrent”
“unethical”

166. Widely Condemned But Widely Practiced
ASA/AGC/ASC Joint Guidelines condemn the practice
of Bid Shopping.
Yet 2008 survey finds:
• 80% know of others who have engaged in bid
shopping
• 32% admit bid shopping or peddling
themselves

167. How is a Contract Formed?
Bid = Offer
General Contractor gets job relying upon Sub’s bid =
Acceptance

168. What is Promissory Estoppel?
If it applies, the General Contractor who relies upon
sub’s bid in getting job can force Sub to honor his
price …
But generally speaking, a sub will not have a right to
demand the General Contractor use it on the job.
This leverage can result in BID SHOPPING.

169. What are the Effects of Bid Shopping?
•
•
•
•
•
•
Defeats the purpose of the competitive bid system;
Promotes lower-quality work;
Incentivizes corner-cutting;
Increases claims and change orders;
Can delay project completion; and
Generally worsens the business environment.

170. What have the Courts said?
The Court of Common Pleas of Cuyahoga County, Ohio,
noted in Sheet Metal Employers’ Ass’n v. Giordano that:
“*m]any hours are invested … in preparing a bid to the … contractor.
The latter may then proceed to play one bidder against another,
getting each in turn to shave its bid as much as it will. Estimated
profit is drastically reduced and financial loss threatens. There is
little satisfaction in such a contract. The temptation of the
[ultimate subcontractor] to do inferior work and to cheat is strong.”

171. Terminations for Price Concessions
May Be Bad Faith
• Bid Shopping (post-contract) in the form of a
Termination for Convenience.
• Violated Duty of Good Faith and Fair Dealing says MD
High Court.
• Questar Builders, Inc. v. CB Flooring, LLC

172. How do General Contractors
Justify Shopping?
Like Shopping for a Car?
“I leverage one supplier against another. Who hasn’t gone to a
car dealer and said there is a better deal down the street?
Should we be surprised if a G.C. accepts a lower price after a
tender closes? This is free money to the [general contractor]
and anyone who doesn’t think it will happen is naïve.”
• Just free competition that lowers prices
• But none of the savings are shared with the Owner
(End User)

173. General Contractor Who Shops Releases
Sub From its Bid
• “Value Engineering”
• Changing Scope
• Attempting to Secure Price Concessions

174. What Measures are Available to Mitigate
Bid Shopping?
• Bid Listing
• Bid Depositories
• Unfair Trade Practices

175. Condition Your Bid: Legal Effects
General Contractor that bid shops releases sub from
mistaken bids and inequitable contract language (loses
promissory estoppel protection).
General Contractor decision to bid shop was a rejection
of the sub’s low bid and a “counteroffer.”
Complete General v. Kard Welding

176. Condition Your Bid – Examples:
• Bid good for earlier of: (a) 30 days from the date of bid; or (b)
one business day after opening of the general contractor’s bid
and notification of the award of the general contract.
• Bid is confidential and any disclosure releases subcontractor
from any obligations it may otherwise have (and imposes
liquidated damages for x% of bid price).
• The general contractor accepts sub’s bid if (1) general uses or
relies on the sub’s bid by incorporating any part of it into a bid to
the owner and (2) owner notifies general of the owner’s intent
to award, or notifies the general of the award.

177. Owners Can Help Protect themselves
Bid Shopping Risks Quality & Provide No Savings to
Owners.
•
Use standard form documents
(like ConsensusDOCS)
•
Require Bid Forms that require sub listing and no
change without good cause

178. Reducing Bid Shopping Starts with You
Educate Your Customers (whether contractors, Owners
& Competitors)

179. Bid Protests
• Most Ohio public construction work must be
awarded through competitive bidding.
WHY?

180. Why a Requirement for Competitive Bidding?
“To provide for open and honest competition in
bidding for public contracts and to save the public
harmless, as well as bidders themselves, from
any kind of favoritism or fraud in its varied forms.”
Cedar Bay Constr., Inc. v. Fremont (1990), 50 Ohio
St.3d 19, 21

181. What Standard Applies to Counties?
“LOWEST AND BEST” BIDDER
(more subjective)
UNLESS “LOWEST, RESPONSIVE & RESPONSIBLE”
BIDDER standard adopted
(more objective)

182. What Standard Applies to Municipalities?
“LOWEST AND BEST” BIDDER
UNLESS DIFFERENT STANDARD ADOPTED
UNDER HOME RULE

183. What is a Bid Protest?
• A bid “protest” is a formal complaint made against
either the:
a) methods employed; or
b) decisions made by a procurement authority
in the process leading to the award of a contract.
→In other words, a bid protest is a challenge to either
the (1) proposed or actual award of a contract for
goods or services, or (2) terms of a Competitive
Bidding Process solicitation for such a contract.

184. Bids Must be Responsive
• “Ohio Rev. Code Section 9.312 - Factors to determine
whether bid is responsive and bidder is responsible.
• (A) If a state agency or political subdivision is required … to
award a contract to the lowest responsive and responsible
bidder, a bidder on the contract shall be considered
responsive if the bidder's proposal responds to bid
specifications in all material respects and contains no
irregularities or deviations from the specifications which
would affect the amount of the bid or otherwise give the
bidder a competitive advantage.”

185. Bids Must be Responsive
• R.C. 9.321 also spells out the factors that the state
agency or political subdivision must consider in
determining whether a bidder is responsible. These
factors are:
– the experience of the bidder,
– the bidder's financial condition, conduct and performance
on previous contracts,
– the bidder’s facilities, management skills, and ability to
execute the contract properly.

186. What Discretion is Vested with
the Public Owner?
• Cannot act in arbitrary or unreasonable fashion.
• Heavy burden to prove an abuse of discretion.
• Courts reluctant to substitute their judgment.

187. Lower Bidder Entitled to
Bid Protest Meeting
1. If Pubic Owner adopts “lowest, responsive and
responsible” bidder standard; or
1. Promises this in bid criteria; or
1. IF REQUESTED by low bidder within 5 days of notice
of rejection.

188. Stay of Award
• Under the Ohio Revised Code 9.312(B) “*w+here a state
agency or a political subdivision” that is required to award to
the lowest responsive and responsible bidders decides “to
award a contract to a bidder other than the apparent low
bidder, it shall meet with the apparent low bidder or bidders
upon a filing of a timely written protest.”
• The protest must be received within five days of the written
notification to the contractor.
• Once a bid protest is made, “*n+o final award shall be made
until the state agency or political subdivision either affirms or
reverses its earlier determination.”

189. Stay of Award
• If the “Administrator determines that the protest
merits further investigation, proceedings of the
evaluation of the bid or awarding of the contract will
be stayed until a final decision is made, unless the
Administrator determines that completing the
evaluation or award process is necessary to protect
the interests of the state.”
• See Ohio Communications & Protest
Procedures, PUR-007, p. 4.

190. How Decided?
• Bid Protest Meetings

191. Who Hears the Protest?
• The applicable State Agency, political subdivision, or
Administrator of Procurement Services, virtually
always with assistance from their counsel, will hear
and issue a decision on the protest.
• See R.C. 9.312, & Ohio Vendor
Handbook, p. 14

192. What Happens at the Bid Protest
Meeting?
Opportunity to be heard
(the contractor’s opportunity to tell its “side
of the story”)
But no guaranteed due process or constitutional rights
such as cross-examination

193. What “Discovery” is Permitted?
• Expect a public records request and unilateral
discovery in advance of the bid protest meeting and
suit

194. When is a Rebid Permitted?
ANYTIME for any reason
REQUIRED IF COST OF PROJECT EXCEEDS
PUBLISHED ESTIMATE BY MORE THAN 10%

195. What Must a Disgruntled Bidder Prove to
Obtain an Injunction?
1. Strong likelihood of success on the merits;
2. Irreparable injuries (no adequate remedy at law);
3. Injunction would not cause substantial harm to
others; and
4. Injunction would serve the public interest.

196. What Can a Public Owner Do if
Injunction Granted?
• Proceed Anyway and Take Chances
(Automatic Stay upon Appeal without Bond)
• Rebid
• Go with Successful Challenger

197. Can a Contractor Recover Money
Damages?
Generally, No.
No Lost Profits: Cementech
But Bid Preparation Costs May Be Recovered:
Meccon v. Akron U.

198. Access to Documents
• Once the evaluation process is complete and a
contract awarded, the response/contract file will be
available for public viewing.
• “A bidder may seek clarification regarding the
evaluation and award process by contacting State
purchasing at the e-mail address listed in the bid.”
• See Ohio Communications & Protest Procedures,
PUR-007 (part of the Ohio Procurement
Handbook for Supplies and Services, p. 170;
http:procure.ohio.gov/pdf/PUR_ProcManual.pdf
)

199. Appeal Rights?
• Decision of the awarding authority is reviewable on
an abuse of discretion standard.

200. What About “Quality Contracting”
Standards?
• Have been enforced when the criteria is expressly
referenced in the bid instructions.
• Subject to much gamesmanship on labor issues.
• Courts reluctant to second-guess even if only minor
deviations (i.e. minor prevailing wage
violations)….until Associated Builders.

201. Associated Builders: Huntington Ballpark
• TPC was low bidder but rejected due to prevailing wage
“violations”.
• Injunctions denied and ballpark completed before case
arrived in Supreme Court.
• Supreme Court found abuse of discretion by Commissioners –
substituted their judgment?
• TPC seeking bid preparation costs and fees.

202. Glidepath Case Study
• State of Ohio ex re. Glidepath LLC v. Columbus Reg’I
Airport Auth., 2012-Ohio-20 (10th Dist.).
• In April 2010, the Airport advertised for bid to
replace the baggage handling system.
• The bidding documents indicated that the project
would be awarded to the lowest responsive and
responsible bidder under Ohio Rev. Code 9.312

203. State of Ohio ex re. Glidepath LLC v.
Columbus Reg’I Airport Auth. Case Study
• Glidepath’s $13.674 Million bid was almost $700,000 low.
• Glidepath’s bid was found to be “responsive” but an 11
member committee determined it was not “responsible” so
the Airport rejected the bid.
• After the first Bid Protest meetings was not successful for
Glidepath, it suit to stop the Airport from awarding the
contract.
• A second bid protest meeting was held, to no avail for
Glidepath.
• It then lost its lawsuit. And appealed.

204. Glidepath Bid Protest Case Study
• The 10th District Court of Appeals stated that:
• “a public authority has considerable discretion in evaluating
bidders and awarding contracts under Ohio’s competitive
bidding laws.”
• And that “Courts … must not substitute their judgment for
that of a public authority in evaluating bidders and awarding
contracts.”
• Finding no abuse of discretion in the Airport’s determination
of non-responsibility, the Court rejected Glidepath’s appeal,
including its request to recover at least its bid preparation
expenses.

205. Associated Builders and Glidepath
Case Studies
• What do they mean for you?

206. Practical Pointers and Considerations
• Deciding Whether to File a Bid Protest
– Under Ohio law, your time to file a bid protest starts running when you
are either: (1) aware of what you consider a protestable error in the
Bid process, or (2) are notified that you are not the successful bidder.
• Much valuable time will be spent deciding whether to file a protest.
– You will have very few hard facts at the beginning of the protest. You
thus have to make factual allegations that meet the criteria of a
successful bid protest. Because you are challenging your potential
customer’s award decision, this is a critical business judgment
decision.
• You must obtain as much information as you can through all means
available.

207. Practical Pointers and Considerations
• Other critical information includes:
• The likelihood of success on the merits
• Can you establish that you have standing to challenge the award?
– You have to show that but for the agency’s error, you would
have had a substantial chance of receiving the award.
• Are you the party who would have been the lowest responsive and
responsible bidder but—for what you believe—was the awarding
authority’s abuse of discretion?
– If so, particularly if you were LOW and you have a viable protest,
you can still receive the contract if the outcome of the protest if
favorable. More revenue is a good thing for your company.

208. Practical Pointers and Considerations
• Cost of filing a bid protest. This is a very important part of your
decision.
– The cost to file a bid protest is very unpredictable.
– Things must be done quickly, a lot of information needs to be gathered
and analyzed. You do not know: (a) if any motions are going to be
filed, (b) whether there will be one or more bid protest meetings or
court hearings, (c) how many documents are in the awarding agency’s
record, or (d) the time it will take your attorney to file a good brief
given the factual and legal issues.
• You have to weigh the certain cost to pursue and risks of agency
success, against the merit of the protest and ultimate revenues
potentially earned if you are successful in getting the government
contract

209. Questions?
Eric Travers, Director
etravers@keglerbrown.com
(614) 462-5473